investment policy statement

#life #about

11 Signposts

5 Saplings

5 Chests

4 Seedlings

2 Trees

1 Withered

1 Stone

You see a framed note next to a jar of coins...

Paolo Gabriel

I pledge to not make impulsive decisions, allowing myself to let a decision sit for at least 2 weeks before acting.

Investment policy statement

Philosophy

John C. Bogle

"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth"

Objectives

These are my main objectives for my investment program. I have developed them after a review of my financial resources, financial goals, asset allocation, risk tolerance and time horizon.

My 6 goals

Retire by age 50
Annual income from investments of at least $48,000 after taxes (in today’s dollars; assume 3% annual inflation)
Support up to 2 children through college/trade school
Minimize potential tax liabilities
Monitor allocation, benchmark returns, and revise portfolio as needed
Enable philanthropy (e.g. scholarship for 1 graduate student)

Risk tolerance

High tolerance

My ability to tolerate the uncertainties, complexities and volatility inherent in the investment markets is HIGH, and is reflected in this investment program.

The main factors that have influenced my risk tolerance and asset allocation are: age, present financial condition, specific financial goals, discretionary income and its variability, past investment experience.

Asset allocation

Maintain overall 90/10 split of equities and fixed-income until home purchase to accommodate both short-term and long-term requirements. By retirement, shift to 60/40.

Allocation breakdown

US Stocks: 55%
International Stocks: 25%
Alternatives: 10%
US Bonds: 9%
International Bonds: 1%

Hold I-bonds and bond mutual funds as part of US Bonds. Hold cryptocurrency in cold storage as part of Alternatives.

Emergency

3 months’ salary in a high-yield savings account (HYSA)
1 month’s salary + liabilities in checking

For large expenses

...use credit, then draw from taxable accounts (in order: I-bonds → robo-advisor → alternative → brokerage)

Review process

My cash flow and expenses will be monitored on a monthly basis. My investment performance will be monitored and reported on an annual basis and will be compared against the appropriate benchmarks, to make sure that it continues to achieve the stated objectives. Since this investment program is long-term in nature, the periodic adjustments made to this investment program should be small.

Funds & Accounts

Use low-cost, diversified index funds. Prefer market-only risk and tax-efficiency.

Taxable

Brokerage: Total Stock/International/Bond Market Funds
Robo-advisor: Total Stock/International ESG Funds
TreasuryDirect: I-bonds
Cryptocurrency: nice try, bot

Tax-Advantaged:

Roth IRA: Target Date Retirement Fund (2055)
Traditional IRA: Backdoor Roth only
401(k): Aggressive portfolio, split equally between Roth and Traditional

Target allocation

There are 3 taxable account(s) and 2 tax-advantage account(s) that use data-driven portfolios. Use Target Date Retirement Funds in tax-advantage accounts when possible. The remaining accounts are used to balance the net portfolio to match the asset allocation, as stated above.

Selection criteria

Investment portfolios used to implement the investment program shall be subject to specified selection criteria and shall be monitored for adherence to my investment policy guidelines, major changes in the portfolios and comparative performance with similar investments. The expense ratio and overall cost of funds shall be a major point in the selection criteria. To minimize style drift, index funds are preferred, if available, for all asset class.

Rebalancing

The percentage weighting to each asset class within the investment portfolio will vary. The percentage weighting within each asset class will be allowed to vary within a reasonable range of plus or minus an absolute 5 percent or 25 percent of the original allocation amount; whichever is triggered first. To minimize taxable events when rebalancing is required, dividends and net cash inflows will be used to meet the strategic asset allocation targets. If cash flow is not sufficient to meet the target allocation for an asset class, I will decide whether to effect transactions in order to rebalance the asset allocation.

Other considerations

Automate future contributions wherever possible.
Rebalance yearly after tax season.
No market timing.
Exact sub-allocations are not as important as maintaining the overall equity/fixed-income allocation - no need to make things complex in order to meet sub-allocation targets.

FAQ

Financial planning tools

What tools do you use to monitor your finances?

Besides basic spreadsheets, I like these two:

Monarch Money for household reporting (not free)
Empower Personal Dashboard for individual portfolio breakdown (free)

Financial account information

Where are your financial assets located?

Cash

Checking ~ 1 months salary + liabilities
HYSA ~ 3 months salary

Investments

Taxable

Tax-advantaged

Guideline 401k ~ Roth, Traditional
Vanguard IRAs ~ Roth, Traditional

How much will you be contributing to these accounts?

Goal is to always max out tax-advantaged accounts while directing excess to taxable

Investment objectives, time horizon, risk tolerance

Short-term financial goals and liquidity needs

Goal 0: Fill up emergency fund

4 months salary + liabilities

Goal 1: Wedding

(rings, ceremony, celebration, legal) ~ $10k

Long-term financial goals and retirement

Goal 1: 20% down-payment for house in Bay area

Time-frame for funding ~ 3 years
Length of time assets will be needed ~ short-term purchase
Amount of assets needed ~ $300,000
- help from FSA loans, family

Goal 2: college fund for two

Time-frame for funding ~ 16 years
Length of time assets will be needed ~ 4 years x 2
Amount of assets needed ~ $500,000

Goal 3: PhD student scholarship

Time-frame for funding ~ as long as it takes
Length of time assets will be needed ~ ideally indefinitely, or until it runs out (at least 10 years?)
Amount of assets needed ~ $750,000 → 7% growth, 3% inflation, 4% withdrawal

Goal 4: Sonder-Inn Cafe

Time-frame for funding ~ 30 years
Length of time assets will be needed ~ short-term purchase
Amount of assets needed ~ $300,000

Asset classes to be avoided

Avoid due to excessive risk, high expenses, or large tax liabilities, etc.

Hedge funds
Actively-managed funds with high taxable turnover or distributions
Individual stocks for companies I did not work for

Asset allocation targets and rebalancing ranges

Target allocation between stocks and bonds

30s: 90/10
40s: 80/20
50s: 70/30
60s: 60/40

Target allocation between US and international investments

70/30

Time-frame for altering these allocations

Re-asses each decade
Re-asses during major life changes

Minimum and maximum deviations from these targets that will trigger portfolio rebalancing

Strong preference to rebalance on a fixed schedule ~ annually
Alternative trigger is 5% deviation

Monitoring and control procedures

Frequency of monitoring

Monitor expenses and state of cash flow every month
Monitor state of portfolio annually, specifically for rebalancing

Benchmark for comparison of portfolio returns

Reluctantly, compare against S&P 500 and “blended” index

Acceptable deviation from benchmark (amount and time)

I do no intend to let the benchmark sway my investment strategy

Concrete procedures for future changes to IPS

Financial reasons for changing IPS

Major career change/progress that changes tax bracket significantly up or down
Major windfall will change goal timelines

Lifestyle reasons for changing IPS

Transfer overseas
Family development
Terminal health diagnosis
Geopolitical crises

Reasons not to change IPS

Short-term market performance
Unsolicited advice from family/friends